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The True Costs of Trade Tariffs to Your CPG Business

As trade disputes between the United States and China escalate, both countries recently expanded their import tariffs for the second time in the past 12 months. The US announced it will raise tariffs from 10% to 25% on certain goods, and China quickly followed suit with their own countermeasures. American businesses and consumers can expect to pay a combined total of $3 billion more per month due to the increased import tax. Experts predict a 0.3% loss in overall economic growth by the end of 2019 and warn that the continuation of trade conflicts could cost at least 300,000 American jobs by the end of the 2020. Just as domestic issues plagued the industry earlier this year with the government shutdown, consumer products are now contending with the implications of an international trade standoff.

Retail

Increased tariffs will hit apparel, luggage, handbags, and furniture items the hardest. 80% of backpacks, suitcases, and other types of luggage sold in the US are imported from China, and the accumulation of the several taxes levied on these products will reach a total of 42.6%.

Most department store-style companies would need to raise prices by 2.3% to maintain current profit levels but are unable to do so because of a decrease in overall consumer spending. Today a family of four would have to spend an average of $767 more per year to buy all the same consumer product goods they purchased in 2017.

In response to the current landscape, retailers plan to scale back on both the production of holiday goods and on seasonal hiring later this year. Some small-scale retailers are shifting away from traditional in-store placements to eCommerce-only strategies in order to speed up the distribution cycle and to have more control over their pricing.

Food and Beverage

The government implemented many of the tariffs affecting the food and beverage industry back in September 2018, but the most recent increase will continue to drive up costs for plastic and other packaging materials. The existing steel and aluminum taxes will have long-term consequences, especially for canned goods and beverage manufacturers. Furthermore, the higher cost of certain metals will also make buying and repairing production equipment more expensive.

Other sectors that will be impacted the most include dairy, beef, pork, soy, and seafood. From 2017 to 2018, the value of soybean exports fell nearly 75% from $12 billion to $3.1 billion. Since beef planning typically occurs in three-year cycles, meat producers are facing an oversupply of parts that don’t sell in Western markets and are being forced to sell food-grade products to pet food manufacturers.

Formerly America’s largest dairy importer, Mexico now levies a 20% retributive tariff on US dairy and brokered a deal with the EU to obtain lower prices. The EU also imposes a 25% tariff on US whiskey and bourbon imports.

Beauty and Personal Care

Tariffs will raise costs for the plastic, chemicals, and packaging materials used not only in food and beverage, but also in the beauty and personal care sector. Turkey, the EU, and Canada are among those already equipped with their own protective tariffs. For example, Canada has placed a 10% tariff on $264.2 million of personal care products including shaving cream, face and body wash, certain nail products, and hairspray. Turkey has also implemented tariffs on $17.3 million worth of health and beauty goods. These trade barriers will affect European-based corporations in addition to American businesses because many personal care companies owned in the EU work with large manufacturing sites based in the US.

Increased tariffs will have major impacts for various consumer products industries as companies will face tighter profit margins domestically and a decreased demand from international markets. By understanding how the heightened tariffs will affect global trade, businesses can anticipate consumer demand, create more effective price strategies, and respond to changes in production costs.

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Coauthor and contributions by Sabrina Zirkle

Tags: Regulatory Strategy & Compliance
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